1. Roger LeRoy Miller
Economics Today
Chapter 3
Demand and Supply

2. Introduction
China has been experiencing water stress. Even though rainfall has been normal, some cities only turn on the water for two hours per day. Can the Chinese only hope for more rain?

3. Learning Objectives Explain the law of demand
Discuss the difference between money prices and relative prices
Distinguish between a change in demand and a change in quantity demanded 3

4. Learning Objectives Explain the law of supply
Distinguish between changes in supply and changes in quantity suppplied
Explain how supply and demand interact to determine equilibrium price and quantity 4

5. Chapter Outline The Law of Demand The Demand Schedule Shifts in Demand5

6. Chapter Outline The Law of Supply The Supply Schedule Shifts in Supply
Putting Demand and Supply Together 6

7. Did You Know That...
More than 75 million people currently own portable cellular phones?
Only 200,000 owned them in 1985?
46 percent of new cellular phone users said that personal safety was the main reason they bought a portable phone? 7

8. Markets
Markets
Arrangements that individuals have for exchanging with one another
Represent the interaction of buyers and sellers 8

9. Markets Markets Markets for gasoline Markets for labor Stock market
Market for Super Bowl tickets
Compact disk market 9

10. Markets
Markets
Markets set the prices we pay and receive 10

11. The Law of Demand Demand
Quantities of specific goods and services that individuals, taken singly or as a group, will purchase at various possible prices, other things being constant 11

12. The Law of Demand Law of Demand
Quantity demanded is inversely related to price, all things equal 12

13. The Law of Demand What are we holding constant? Income
Price of other goods
Many other factors 13

14. The Law of Demand Relative prices versus money prices Relative Price
The price of a commodity in terms of another commodity
Money Price
Price we observe today in today’s dollars (absolute, nominal price) 14

15. Money Price versus Relative Price
Money Price Relative Price
Price Last Year Price This Year Price Last Year Price This Year
$12 $6
= 2.0
= 0.5
$14 $8
= 1.75
= 0.57
CDs $12 $14
Cassettes $6 $8

16. International Example: High Relative Price of a U.S. Education
Concept: relative prices
About 40 percent of international students in 1993 were in the U.S. compared to 30 percent today.
During the 1990s tuition and fees in U.S. universities rose faster than those at foreign universities . 16

17. International Example: High Relative Price of a U.S. Education
Question
If the relative price of an education at U.S. universities continues to increase, what other means could these universities use to try to regain their lost share of international students? 17

18. The Demand Schedule
The demand schedule is a table relating prices to quantity demanded.
We must consider:
The time dimension
Constant-quality units 18

19. The Individual Demand Schedule
Figure 3-1, Panel (a)

20. The Individual Demand Curve
Figure 3-1, Panel (b)

21. The Horizontal Summation of Two Demand Schedules
Figure 3-2, Panel (a)

22. The Horizontal Summation of Two Demand Schedules
Figure 3-2, Panels (b), (c), and (d)

23. The Market Demand Schedule for Minidisks
Figure 3-3, Panel (a)

24. The Market Demand Curve for Minidisks
Figure 3-3, Panel (b)

25. Garth Brooks, Used CDs, and the Law of Demand
Scenario
Garth Brooks attempts to prevent the sale of used CDs
Questions
What impact would this have on the sale of new CDs?
Does this apply to the market for used books? 25

26. Shifts in Demand Scenario
The federal government gives every college student registered in college a minidisk player-recorder. 26

27. A Shift in the Demand Curve
If some factor other than price changes, the only way we can show its effect is by moving the entire demand curve 5 D1 4
Price of Minidisks ($) 3 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

28. A Shift in the Demand Curve5
Suppose the federal government gives every student a minidisk player-recorder D1 4
Price of Minidisks ($) 3 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

29. A Shift in the Demand Curve5
Suppose the federal government gives every student a minidisk player-recorder D2
Increase in demand 4
Price of Minidisks ($) 3 2 1 D1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

30. A Shift in the Demand Curve
Decrease in demand 5
Suppose universities outlaw the use of minidisk player-recorders 4
Price of Minidisks ($) 3 2 D2 1 D1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

31. A Shift in the Demand Curve5
When demand increases the quantity demanded will be greater at each price D2 D1 4 a c
Price of Minidisks ($) 3 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

32. A Shift in the Demand Curve5
When demand increases the quantity demanded will be greater at each price 4 a b
Price of Minidisks ($) 3 c d 2 D2 1 D1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

33. A Shift in the Demand Curve5 4
Price of Minidisks ($) 3 2 D2 1 D1 D3 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)
Figure 3-4

34. Shifts in Demand Determinants of demand Income Tastes and preferences
The price of related goods
Complements
Substitutes 34

35. Shifts in Demand Determinants of demand Expectations
Future prices
Income
Product availability
Market size (number of buyers) 35

36. The Determinants of Demand
Shifts in Demand
The Determinants of Demand
Income: Normal Good
Price
Decrease in income
decreases demand D3
Increase in income
increases demand D2 D1
Q/Units

37. The Determinants of Demand
Shifts in Demand
The Determinants of Demand
Income: Inferior Good
Price
Increase in income
decreases demand D3
Decrease in income
increases demand D2 D1
Q/Units

38. Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand
Income: Tastes and Preferences
Price
Smoking
• Decrease in demand D3
Sport Utility Vehicle
• Increase in demand D2 D1
Q/Units

39. Shifts in Demand Price D2 D1 Q/Butter The Determinants of Demand
Price of Related Goods: Substitutes
Price
Butter and Margarine
• Price of both = $2/lb. • Price of margarine increases to $3/lb.
• Demand for butter increases D2 D1
Q/Butter

40. Shifts in Demand Price D2 D1 Q/Butter The Determinants of Demand
Price of Related Goods: Substitutes
Price D2
Butter and Margarine
• Price of both = $2/lb. • Price of margarine decreases to $1/lb.
• Demand for butter decreases D1
Q/Butter

41. Shifts in Demand Price D2 D3 D1 Q/Speakers The Determinants of Demand
Price of Related Goods: Complements
Price
Speakers and Amplifiers
• Decrease the relative price of amplifiers
• Demand for speakers increases D2 D3
Speakers and Amplifiers
• Increase the relative price of amplifiers
• Demand for speakers decreases D1
Q/Speakers

42. The Determinants of Demand
Shifts in Demand
The Determinants of Demand
Expectations
Price D3
Expectations of a lower income or of a future price decrease increases demand
Expectations of higher income or of a future price increase decreases demand D2 D1
Q/Units

43. The Determinants of Demand
Shifts in Demand
The Determinants of Demand
Population
Price D3
Decrease in population decreases demand
Increase in the population increases demand D2 D1
Q/Units

44. Shifts in Demand Changes in demand versus changes in quantity demanded
A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand.
This is a movement of the curve. 45

45. Shifts in Demand Changes in demand versus changes in quantity demanded
A change in a good’s own price leads to a change in quantity demanded.
This is a movement on the curve. 46

46. Movement Along a Given Demand Curve5 4 3
Price of Minidisks ($) 2 1 2 4 6 8 10 12
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

47. Movement Along a Given Demand Curve5 D
A change in the price changes the quantity of a good demanded 4 3
Price of Minidisks ($) 2 1 2 4 6 8 10 12
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

48. Movement Along a Given Demand Curve5 D
A change in the price changes the quantity of a good demanded 4 3
Price of Minidisks ($) 2 1 2 4 6 8 10 12
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

49. Movement Along a Given Demand Curve5
A change in the price changes the quantity of a good demanded 4 3
Price of Minidisks ($) 2 1 D 2 4 6 8 10 12
Quantity of Minidisks Demanded
(millions of constant-quality units per year)
Figure 3-5

50. The Law of Supply Supply
The amount of a product or service that firms are willing to sell at alternative prices 50

51. The Law of Supply Law of Supply
The price of a product or service and the quantity supplied are directly related 51

52. The Supply Schedule
The supply schedule is a table relating prices to quantity supplied. 52

53. The Individual Producer’s Supply Schedule
Figure 3-6, Panel (a)

54. The Individual Producer’s Supply Curve
Figure 3-6, Panel (b)

55. Horizontal Summation of Supply Curves
Figure 3-7, Panel (a)

56. Horizontal Summation of Supply Curves
Figure 3-7, Panels (b), (c), and (d)

57. The Market Supply Schedule for Minidisks
Figure 3-8, Panel (a)

58. The Market Supply Curve for Minidisks
Figure 3-8, Panel (b)

59. Shifts in Supply Scenario
A new method of coating minidisks reduces the cost of producing a minidisk by 50 percent. 59

60. A Shift in the Supply Curve5 S1 4
If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve
Price of Minidisks ($) 3 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

61. A Shift in the Supply Curve5 S1 S2 4
Price of Minidisks ($) 3
If costs decrease, supply increases 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

62. A Shift in the Supply Curve5 S1 S2 4
Price of Minidisks ($) 3
If costs increase, supply decreases 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

63. A Shift in the Supply Curve5 S1 4
When supply increases the quantity supplied will be greater at each price
Price of Minidisks ($) 3 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

64. A Shift in the Supply Curve5 S2 S1 a c 4
When supply increases the quantity supplied will be greater at each price
Price of Minidisks ($) 3 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

65. A Shift in the Supply Curve5 S2 S1 a 4 b c
Price of Minidisks ($) 3
When supply increases the quantity supplied will be greater at each price d 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

66. A Shift in the Supply Curve5 S1 a c b d 4
Price of Minidisks ($) 3
When supply decreases the quantity supplied will be less at each price 2 1 2 4 6 8 10 12 14
Quantity of Minidisks Demanded
(millions of constant-quality units per year)

67. Shifts in Supply Determinants of supply Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations
Number of firms in industry 67

68. The Determinants of Supply
Shifts in Supply
The Determinants of Supply
Cost of Inputs
Price
Increase in income
decreases supply S3
Increase in income
increases demand S2 S1
Q/Units

69. Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply
Technology and Productivity
Price
Decreases in productivity decrease supply S3
Improvements in technology or increases in productivity increase supply S2 S1
Q/Units

70. The Determinants of Supply
Shifts in Supply
The Determinants of Supply
Taxes and Subsidies
Price
Increases in taxes or decreases in subsidies decrease supply S3
Decreases in taxes or increases in subsidies increase supply S2 S1
Q/Units

71. The Determinants of Supply
Shifts in Supply
The Determinants of Supply
Price Expectations
Price
Expectations of lower prices decrease supply S3
Increase in the number of firms increases supply S2 S1
Q/Units

72. Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply
Number of Firms in Industry
Price
Decrease in the number of firms decreases supply S3
Increase in the number of firms increases supply S2 S1
Q/Units

73. Shifts in Supply Changes in supply versus changes in quantity supplied
A change in one or more of the non-price determinants will lead to a change in supply.
This is a movement of the curve. 73

74. Shifts in Supply Changes in supply versus changes in quantity supplied
A change in a good’s own price leads to a change in quantity supplied.
This is a movement on the curve. 74

75. Putting Demand and Supply Together
Figure 3-10

76. Putting Demand and Supply Together5 S D 4 A B
Excess quantity demanded at price $1
Shortage
• At P = $1: Qs (A) = 2 > Qd (B) = 10
• All prices below $3 Qd > Qs
• Price will pushed up 3
Price of Minidisks ($) 2 1 2 4 6 8 10 12
Quantity of Minidisks
(millions of constant-quality units per year)

77. Putting Demand and Supply TogetherC
Excess quantity demanded at price $5
Surplus
• At P = $5: Qd (D) = 2 < Qs (C) = 10
• All prices below $3 Qd < Qs
• Price will pushed up 5 S 4 3
Price of Minidisks ($) 2 1 D 2 4 6 8 10 12
Quantity of Minidisks
(millions of constant-quality units per year)

78. Putting Demand and Supply Together
Excess quantity demanded at price $5 5 S D C
Equilibrium
Market clearing, or equilibrium price E 4 3
Price of Minidisks ($) 2 A B 1 D
Excess quantity demanded at price $1 2 4 6 8 10 12
Quantity of Minidisks
(millions of constant-quality units per year)

79. Putting Demand and Supply Together
Equilibrium
The situation when quantity supplied equals quantity demanded at a particular price 83

80. Putting Demand and Supply Together
Shortages
The situation when quantity demanded is greater than quantity supplied
Exists at any price below the equilibrium price
Is not the same as scarcity 84

81. Putting Demand and Supply Together
Surpluses
The situation when quantity supplied is greater than quantity demanded
Exists at any price above the equilibrium price 85

82. Why Babysitters Are Earning More
The market price of babysitting services is up
Increased demand as the number of children younger than 10 rose from 33 million to 40 million between and 2000
Decreased supply as the number of Americans aged 10–19 dropped by 5 percent between 1990 and 2000 86

83. The Changing Price of Babysitting Services
Figure 3-11

84. Explaining Why Babysitters are Earning More
Question
What is likely to happen to the price of babysitting services if retiring baby boomers decide to earn extra income by offering to spend some of their time babysitting? 88

85. Should Shortages in the Ticket Market Be Solved by Scalpers?
Figure 3-12

86. In China, lack of water is a big problem
Issues and Applications: China’s Water Shortage—Too Little Rain or Not Enough Pricing?
In China, lack of water is a big problem
Construction of dams
Until a few years ago water had a zero price
Currently water is priced below its opportunity cost
If price rose enough, shortages would disappear

87. Web Links
The following Web links appear in the margin of this chapter in the textbook:
waobr/wasde-bb

88. Summary Discussion of Learning Objectives
The law of demand says that prices and quantity demanded are inversely related.
Relative prices must be distinguished from money, since people respond to changes in relative prices. 91

89. Summary Discussion of Learning Objectives
A change in quantity demanded versus a change in demand
A change in quantity demanded is a movement along a demand curve
A change in demand is a shift of the demand curve
The law of supply states that price and quantity supplied are directly related. 92

90. Summary Discussion of Learning Objectives
A change in quantity supplied versus a change in supply
A change in quantity supplied is a movement along a supply curve
A change in supply is a shift of the supply curve 93

91. Summary Discussion of Learning Objectives
Determining market price and equilibrium quantity
The demand and supply curves intersect at the equilibrium point.
Shortages exist when the price of a good is below the market price.
Surpluses exist if the price of the good is greater than the market price. 94

92. End of Chapter
Chapter 3
Demand and Supply